Fairness opinions › Specialty Outpatient Facilities › 2011

NovaMed acquired by Surgery Partners: fairness opinion by William Blair

Announced January 21, 2011 · Going-private · All cash · DEFM14A filed April 6, 2011

Specialty Outpatient Facilities ASC Sponsor: H.I.G. Capital, L.L.C.

Enterprise value

$214M

EV / LTM EBITDA

7.8x

EBITDA $27.3M · 18% margin

EV / LTM revenue

1.41x

revenue $152M

DCF discount rate

12.0%–16.0%

Exit multiple

Deal terms

ConsiderationAll cash

Price per share$13.25

Premium1.8%

Premium basisclosing price of $13.02 on January 19, 2011, one day prior to announcement

StructureGoing-private

Termination fee$4.4M

Reverse termination fee$6.6M

Go-shopNone

Outside dateMay 19, 2011

FilingDEFM14A · EDGAR index

Implied value per share by method vs. $13.25 offer

Discounted cash flow $10.03 – $16.20

Leveraged Buyout Analysis $10.03 – $14.90

Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.

Opinion of William Blair to the target board

Delivered January 20, 2011

Discounted cash flow assumptions

Discount rate12.0%–16.0%

BasisNovaMed weighted average cost of capital analysis applying the capital asset pricing model

Terminal valueExit multiple

Perpetuity growth—

Exit multiple7.0x–8.0x 2015E EBITDA less non-controlling interests

Projection period2011E-2015E

Projections usedForecasts prepared by senior management of NovaMed

Implied value per share$10.03–$16.20

Unlevered after-tax free cash flow defined as EBITDA less non-controlling interests less taxes, capex and changes in net working capital; equity value per share derived using approximately 8.2 million fully-diluted shares as of January 19, 2011.

Selected public companies (7)

AmSurg Corp. · Community Health Systems, Inc. · Health Management Associates Inc. · LifePoint Hospitals Inc. · Select Medical Holdings Corporation · Tenet Healthcare Corp. · Universal Health Services Inc.

Multiple	Peer low	Peer median	Peer high	Range applied	Implied per share
Enterprise Value / LTM EBITDA less non-controlling interests	5.8x	7.3x	8.0x	—	—
Enterprise Value / 2010E EBITDA less non-controlling interests	6.0x	7.3x	8.0x	—	—
Enterprise Value / 2011E EBITDA less non-controlling interests	5.4x	6.8x	8.0x	—	—
Equity Value / LTM Net Income	10.9x	11.5x	14.0x	—	—
Equity Value / 2010E Net Income	12.1x	13.2x	16.1x	—	—
Equity Value / 2011E Net Income	9.9x	11.9x	12.5x	—	—

Selected precedent transactions (8)

Date	Target	Acquirer	Multiple
2011-01	National Surgical Hospitals, Inc.	Irving Place Capital	6.7x EV / LTM EBITDA less non-controlling interests
2010-06	Regency Hospital Company, L.L.C.	Select Medical Holdings Corporation	7.6x EV / LTM EBITDA less non-controlling interests
2007-04	Symbion Inc.	Crestview Partners, L.P.	10.8x EV / LTM EBITDA less non-controlling interests
2007-03	HealthSouth Corporation, Surgery Centers Division	TPG Capital	13.0x EV / LTM EBITDA less non-controlling interests
2007-03	Triad Hospitals, Inc.	Community Health Systems, Inc.	9.6x EV / LTM EBITDA less non-controlling interests
2007-01	United Surgical Partners International, Inc.	Welsh, Carson, Anderson & Stowe	11.5x EV / LTM EBITDA less non-controlling interests
2006-07	HCA, Inc.	Bain Capital, LLC, Kohlberg Kravis Roberts & Co. L.P., and Merrill Lynch Global Private Equity	8.3x EV / LTM EBITDA less non-controlling interests
2006-01	Surgis, Inc.	United Surgical Partners International, Inc.	15.1x EV / LTM EBITDA less non-controlling interests

Multiple	Low	Median	High	Range applied	Implied per share
Enterprise Value / LTM EBITDA less non-controlling interests	6.7x	10.2x	15.1x	—	—

Other analyses

Analysis	Summary	Implied per share
Premiums Paid Analysis (252 acquisitions of public domestic companies since Jan 1, 2007, EV $100-$500 million)	Implied premiums in the merger of 1.8% (1 day), 1.3% (1 week), 11.8% (1 month), 19.7% (60 days), 22.6% (90 days) and 69.2% (180 days) compared against percentile distributions of premiums paid; median (50th percentile) premiums were 31.0% (1 day), 33.9% (1 week), 34.2% (1 month), 37.5% (60 days), 42.2% (90 days) and 27.4% (180 days).	—
Premiums Paid Analysis (22 acquisitions of public healthcare services companies since Jan 1, 2005)	Same implied merger premiums compared to healthcare-specific percentile data; median premiums were 24.4% (1 day), 25.8% (1 week), 29.7% (1 month), 29.1% (60 days), 35.6% (90 days) and 25.0% (180 days). William Blair also noted NovaMed's stock rose 37.9% from $9.44 to $13.02 following a September 28, 2010 mergermarket article on the sale process, versus 9.6% for the selected public companies.	—
Leveraged Buyout Analysis	Based on management forecasts for FY2011-2015, assumed exit multiples of 7.0x-8.0x 2015E EBITDA less non-controlling interests and required IRRs of 20%-30% for a hypothetical financial sponsor exiting in 2015.	$10.03–$14.90

Retainer fees of $50,000, a $250,000 fee payable upon delivery of the fairness opinion, and a transaction fee equal to 1.30% of transaction value (credited for retainer/opinion fees) contingent upon closing, approximately $2.7 million illustratively. William Blair previously provided investment banking services to NovaMed in 2005 for a $20,000 retainer, and provides services to H.I.G. portfolio companies.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	Year 5	CAGR
Revenue	$158M	$172M	$186M	$201M	$217M	8.1%
Revenue growth	4.5%	8.7%	8.2%	7.9%	7.6%
EBITDA	$29.3M	$32.4M	$35.9M	$39.6M	$43.5M	10.4%
EBITDA growth	7.4%	10.6%	10.8%	10.3%	9.8%
EBITDA margin	18%	19%	19%	20%	20%
Implied EV / EBITDA	7.3x	6.6x	6.0x	5.4x	4.9x

Year-1 growth is against LTM at announcement ($152M revenue, $27.3M EBITDA); later years are year over year.

William Blair used forecasts prepared by NovaMed senior management covering January 1, 2011 through December 31, 2015, including EBITDA less non-controlling interests, net income and EPS estimates for fiscal 2010 and 2011. These forecasts supported both the discounted cash flow analysis (unlevered after-tax free cash flow defined as EBITDA less non-controlling interests, less taxes, capital expenditures and changes in net working capital) and the leveraged buyout analysis. The filing section provided does not disclose the specific revenue or EBITDA dollar figures for the first and last forecast years.

Process notes

Going-private transaction with H.I.G. Capital affiliate; four NovaMed officers (Scott T. Macomber, Thomas J. Chirillo, John P. Hart and John W. Lawrence, Jr.) are rollover stockholders who will hold approximately 3.1% of Holdings on a fully diluted basis. William Blair's opinion expressly excluded the rollover stockholders, Parent, Merger Sub and their affiliates. Reverse termination fee increases from $6,552,000 to $10,920,000 in certain circumstances, guaranteed by H.I.G. Bayside Debt & LBO Fund II, L.P. William Blair disclosed ongoing investment banking relationships with H.I.G. portfolio companies. The merger consideration implied 7.6x LTM EBITDA less non-controlling interests, above the public company mean/median but below the precedent transaction mean (10.3x) and median (10.2x).

Other Specialty Outpatient Facilities fairness opinions

HealthTronics / Endo Health Solutions 2010 · 8.7x EV/EBITDA
Dialysis Corporation of America / U.S. Renal Care 2010 · 14.1x EV/EBITDA
AmSurg / Envision Healthcare Holdings 2016 · 12.0x EV/EBITDA
Alliance Healthcare Services / Tahoe Investment Group Co. 2017 · 5.7x EV/EBITDA
Surgical Care Affiliates / Optum 2017 · 16.4x EV/EBITDA
FONAR / Damadian family Acquisition Group 2025 · 4.3x EV/EBITDA

All Specialty Outpatient Facilities opinions → · William Blair opinions